Archives for business



Why Family-Firm CEOs Underperform Professional CEOs

The topic of family businesses has long been of interest around here. Stephen Dubner wrote about it a few months ago, and our “Church of Scionology” podcast looked at the research on family firms.  A new working paper (abstract; PDF) from Oriana Bandiera, Andrea Prat, and Raffaella Sadun explores how the behavior of family firm CEOs differs from that of professional CEOs, and why the former seem to perform worse. If you had to sum it up in one word: sloth. From the abstract: Read More »



Selling Off the Family Business

With the recent sale of The Washington Post to Jeff Bezos, the less-recent sale of the Wall Street Journal to Rupert Murdoch’s News Corp., and the N.Y. Times’s exuberant denial that it is for sale, one thing came to mind: family businesses.

Not an obvious common thread, perhaps. But I have long been interested in how family-run businesses succeed or fail — and in fact this week have just re-released an hour-long Freakonomics Radio podcast on the topic, “The Church of ‘Scionology’” (subscribe here). It features stories on a pair of family beer businesses — Anheuser-Busch and Yuengling — as well as the strange tale of adult adoptions in Japan in the service of corporate stability (i.e., if your son or daughter isn’t up for the job of running your company, then you can simply adopt your successor).

The Post and Journal were long-held family businesses, the Post by the Graham family and the Journal by the Bancrofts. The Times, in an ownership structure similar to the Post, is a public company whose voting shares are controlled by the Ochs-Sulzberger family, and Arthur Sulzberger, like his ancestors before him, is the publisher of the newspaper. I haven’t worked at the Times for some time but the feeling then — and I am told that the feeling persists — is that the Sulzberger family has done an extraordinary job of protecting the editorial integrity of the newspaper, as might be expected of a family steward, but has been less competent than one might wish in shepherding its business interests. (This is all speculation, of course, as there is no counterfactual.) Read More »



Are Socially Responsible Businesses Bad for Society?

Writing for Foreign Policy, Daniel Altman argues against socially responsible business initiatives such as the recently launched “B Team.”  For-profit companies, explains Altman, often think long-term:

As Jonathan Berman and I have written in the past, for-profit companies that take a long time horizon in their decision-making are likely to make more social and environmental investments. Things like training workers, bolstering communities, and protecting ecosystems can take a long time to pay off for private companies. When they do, the return — including a stronger labor pool, a wealthier consumer base, fewer working days lost to strikes and protests, and greater employee loyalty — can be comparable to other for-profit investments.

In fact, strictly for-profit companies can be among the best social investors because they apply the same discipline to these investments that they would to other parts of their core business. Energy and mining companies, for example, have some of the longest time horizons in the private sector, and they tend to be big social investors as well. Some European companies have actually stopped issuing quarterly reports to shift the attention of analysts to the long-term. And because they are still targeting a single bottom line, profit, there’s no loss of clarity about their mission or erosion of transparency for shareholders.

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Why Family and Business Don’t Mix: A New Marketplace Podcast

Our latest Freakonomics on Marketplace podcast is called “Why Family and Business Don’t Mix.” (You can download/subscribe at iTunes, get the RSS feed, listen via the media player above, or read the transcript.) It’s based on a recent paper by Alberto Alesina and Paola Giuliano called “Family Ties.” It argues that strong family ties bring a lot of benefits, but  may also depress economic activity:

We study the role of the most primitive institution in society: the family. Its organization and relationship between generations shape values formation, economic outcomes and influences national institutions. We use a measure of family ties, constructed from the World Values Survey, to review and extend the literature on the effect of family ties on economic behavior and economic attitudes. We show that strong family ties are negatively correlated with generalized trust; they imply more household production and less participation in the labor market of women, young adult and elderly. They are correlated with lower interest and participation in political activities and prefer labor market regulation and welfare systems based upon the family rather than the market or the government. Strong family ties may interfere with activities leading to faster growth, but they may provide relief from stress, support to family members and increased wellbeing. We argue that the value regarding the strength of family relationships are very persistent over time, more so than institutions like labor market regulation or welfare systems.

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Putting Microeconomics to Work

I’ve long been puzzled by the almost complete disconnect between real-world businesses and academic economics.  After I graduated from college, I went to work as a management consultant.  Almost nothing I learned as an economics major proved helpful to me in that job.  Then, when I went back to get a Ph.D., I thought what I had learned in consulting would help me in economics.  I was wrong about that as well!

Ever since, I’ve felt that both business and economics would benefit from a greater connection.  Why don’t businesses set prices the way economics textbooks say they should?  Why are randomized experiments so rare in business?  Why do economists write down models of how businesses behave without spending time watching how decisions are actually made at businesses? The list goes on and on. Read More »



The Cost of Friendship

Interesting if perhaps not so surprising: in a new working paper called “The Cost of Friendship,” Paul Gompers, Vladimir Mukharlyamov, and Yuhai Xuan argue that even in as performance-based an industry as venture capital, people tend to collaborate with people who have similar backgrounds, often to their detriment:

This paper explores two broad questions on collaboration between individuals.  First, we investigate what personal characteristics affect people’s desire to work together.  Second, given the influence of these personal characteristics, we analyze whether this attraction enhances or detracts from performance.    Addressing these problems in the venture capital syndication setting, we show that venture capitalists exhibit strong detrimental homophily in their co-investment decisions.  We find that individual venture capitalists choose to collaborate with other venture capitalists for both ability-based characteristics (e.g., whether both individuals in a dyad obtained a degree from a top university) and affinity-based characteristics (e.g., whether individuals in a pair share the same ethnic background, attended the same school, or worked for the same employer previously). 

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An Airline Buys an Oil Refinery; What Took Them So Long?

Fascinating article in today’s Wall Street Journal, by Susan Carey and Angel Gonzelez: “Delta to Buy Refinery in Effort to Lower Jet-Fuel Costs.” Coupled with the news of Microsoft bankrolling B&N’s Nook business, the Delta deal shows how far and fast existing business models are shifting, and how vertical integration continues to not be dead. Read More »



Can Consultants Improve Small Firms?

A few months ago I ran a contest here at Freakonomics (results here) to predict the outcome of a randomized trial on charitable giving.

Although we are long way from realization (and it may be a pipe dream), the idea is simple: imagine a market on results from research studies. This could help not just hold people accountable for their ex-ante stated views, but also serve as a guiding tool for investors, practitioners, policymakers and donors, to help make decisions and allocate resources using the collective wisdom of markets. Of course this requires liquidity, and a certain faith in markets. Anyhow, until that dream comes true, we are doing this the simple way: running contests! Read More »